Providing more on Environmental and Resource Economics

Breaking away from existing technological trajectories

Allow me a personal anecdote: Back in 1982 my mother moved, and I helped tidy up her attic. My attention was caught by an old, faded volume of Reader’s Digest from around 1960 with a short article on The Car of the Future. As I recall, the article predicted that the car of the 1970s would be jet-driven, whereas the car engine of the 1980s would undoubtedly be nuclear. More than half a century later the vast majority of cars are still fuelled by petrol/gasoline. Electric cars have started making some headway, but the leap from one technological trajectory to another has proven extremely difficult.

As early as 1907 the Detroit Electric Company had introduced an electric car (as donaldists know, Grandma Duck had one), but despite much effort the electric car market of the 20th century absolutely remained a niche market. In 1994, Schot et al. gave the following explanation of the technological lock-in that had made it so difficult for electric cars to gain significant market shares:

“In evolutionary theories of technical change automobile history is often portrayed as an exemplar of lock-in. In 1895 the gasoline powered car was held to be the least promising option. Steam and electric vehicles contained attractive futures. Due to a series of circumstances gasoline got the lead and subsequently proved to be unassailable, so the story goes.” … Prevailing systems have gone through a series of incremental improvements and have gained precise user understanding. To solve compatibility problems a number of complementary technologies have been developed. Misfits with the societal and political system have been accommodated.

(Schot et al. 1994, p. 1061)

It is simple to illustrate the dynamic aspects of this lock-in (cf. Arthur 1988). Suppose the cost of using technology I (the first technology introduced) decreases with the cumulative usage of that technology.

Figure 1. The dynamic aspects of technological lock-in

In Figure 1 the new technology is clearly superior to the existing technology at any level of cumulative usage. Shifting from the existing trajectory to the new one takes risk-willingness as well as deep pockets and long-term commitment.

It takes risk-willingness because the future trajectory of the new technology is bound to be uncertain. Deep pockets are obviously needed to match the cumulative technological knowledge built into the existing technology. And long-term commitment is needed to obtain the market shares and scale economies that will bring costs down.

Despite this, governments and, in some cases, city councils, have tried to jump start new technologies by subsidizing them in various ways. For example, Greentech Media in 2013 reported that Lancaster, California, had become the first US city to require solar panels on all new houses. More generally, Governor Schwarzenegger had introduced a plan in 2010 to exempt “green tech” from sales tax on their equipment. The Danish policy vis-à-vis the wind industry is a similar example of government intervention to boost a specific green technology and develop a local competitive position in supplying it.

Rather than airing my personal opinions, I would like to invite you to share your thoughts about the merits and demerits of such a technology policy.

Is it possible for governments to have the requisite knowledge to make such investments, or should they rather leave it to the market?

The environmental motivation for shifting to a greener trajectory may well be that the existing technology is associated with externalities which are not internalised in the private costs of using it. Suppose the new technology can be made commercially competitive only if this happens. Does this warrant a policy of permanently subsidising the new technology if in fact it doesn’t?

The previous two bullet points both reflect a scepticism concerning the wisdom of such policies. Faced with the serious threats of climate change, one could argue, however, that we need much more of this. Perhaps the EU could harness the resources required to engender technical change on the scale required to meet this challenge.

The most used example for a lock-in-effect is the qwerty-system on our computer keyboards. We are well aware that we would be more efficient using another system than the one we currently favor. The argument for shifting technology would be an economic rational that in the right time perspective will be beneficial (as the figure above so needly describes). The benefits will at some point exceed the initial transition costs.

However, the example of shifting from fossil fuels to green technologies (or renewables) go beyond an economic rational. It brings in the moral aspects of acknowledging that our current way of living exceeds the ability of the biosphere to absorb our GHG emissions, changing the climatic conditions for our civilization. We are not fully aware of the consequences that our current actions have for the future.

We need to understand and debate how we can tackle the scope and uncertainty of environmental and social costs of our excessive fossil consumption. They by far exceed the costs of the green technology. The politicians have, I believe, an obligation to speed up the green transition, and it is an urgent call!

I think transitioning away from fossil fuels must work as a combination of state and industry investment. Part of the challenge for firms seems to be that the network infrastructure (pipelines, ports, grids, etc) is significant and needs accompanying regulation to reduce externalities and risks – so that investments need to either fit in to the existing structures or rethink the infrastructure itself (e.g. LNG, smart grids, off-the-grid such as Tesla home batteries) – there are in fact at least two stages to the lock-in due to the network issues. But there is a great deal of potential profit to be made in success – even at regulated margins there is so much demand for energy/electricity if (internal and external) costs can be lowered. Private incentives to chase these savings will probably remain more successful than state ones, imho.